Yes Bank's Ratings got Downgraded by Moody's Due to Rana Kapoor's Exit

Moody’s Investors Service downgraded Yes Bank’s ratings to non-investment grade and changed outlook to negative from stable on the back of various resignations from the Board.

The resignations, when seen in conjunction with RBI’s September directive to restrict the term of the bank’s MD & CEO Rana Kapoor, till January 31, 2019, have raised concerns over corporate governance, it said.

“Although the bank’s reported credit fundamentals remain stable, the developments surrounding the transition in leadership as well as the governance issues are credit negative because they complicate management’s effective implementation of the bank’s long-term strategy,” it said.

Furthermore, these developments could constrain the bank’s ability to raise new capital, Moody’s said.

Moody’s has downgraded foreign currency issuer rating to ‘Ba1’ from ‘Baa3’, and also the bank’s baseline credit assessment (BCA) and adjusted BCA to ‘ba2’ from ‘ba1’. The rating implies that these instruments are non-investment grade, speculative.

The outlook, where applicable, has been changed to negative from stable.

Moody’s said although Yes Bank’s capitalisation is adequate, the bank would need to raise capital from the market to continue to grow its balance sheet more rapidly than the Indian banking system.

“If Yes Bank experiences difficulty in raising external capital, this will impede the bank’s ability to grow its loan book,” the US-based agency said in a statement.

Moody’s said while Yes Bank’s current asset quality metrics are superior to those of its Indian peers, its aggressive growth strategy poses asset risks.

“In particular, Moody’s has noted significant divergence in the bank’s reported asset quality metrics compared with the RBI’s assessment of asset quality in 2016-17 and 2015-16  While the results of RBI’s risk-based supervision report for 2017-18 are not known as yet, nevertheless, any adverse findings from its assessment will be credit negative,” it said.

“Nevertheless, its funding profile is relatively weaker compared to other public sector banks in India, as measured by its low current and savings account deposit ratio and the dominance of corporate deposits,” it said.

The outlook has been revised to negative, after taking into account the uncertainty relating to the bank’s asset quality and profitability performance and in particular any  adverse findings from RBI’s risk-based supervision report.